Among the more memorable news events of last year were the US Senate Subcommittee on Investigations’ hearings into the financial crisis.* This April, the Subcommittee published its 650 pages report on the crisis, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, focusing on four aspects:
High Risk Lending
Inflated Credit Ratings
Investment Bank Abuse
The report concludes that a severely compounding factor in the crisis was investment bank abuse. Case studies in the report relate to the cooperation between Goldman Sachs and Deutsche Bank. Quite interesting since I firmly believe that the contacts between Deutsche Bank and the Icelandic banks merit some attention (hope to clarify this on Icelog in the near future).
Summaring, the report points out:
The four causative factors examined in this Report are interconnected. Lenders introduced new levels of risk into the U.S. financial system by selling and securitizing complex home loans with high risk features and poor underwriting. The credit rating agencies labeled the resulting securities as safe investments, facilitating their purchase by institutional investors around the world. Federal banking regulators failed to ensure safe and sound lending practices and risk management, and stood on the sidelines as large financial institutions active in U.S. financial markets purchased billions of dollars in mortgage related securities containing high risk, poor quality mortgages. Investment banks magnified the risk to the system by engineering and promoting risky mortgage related structured finance products, and enabling investors to use naked credit default swaps and synthetic instruments to bet on the failure rather than the success of U.S. financial instruments. Some investment banks also ignored the conflicts of interest created by their products, placed their financial interests before those of their clients, and even bet against the very securities they were recommending and marketing to their clients. Together these factors produced a mortgage market saturated with high risk, poor quality mortgages and securities that, when they began incurring losses, caused financial institutions around the world to lose billions of dollars, produced rampant unemployment and foreclosures, and ruptured faith in U.S. capital markets. (P. 12.)
Professor William Black (the link is to an interview with Black on the S&L crisis vs now) and others have been calling out for criminal investigations into the role of the major banks during the crisis, comparing the situation now with investigations into the Savings & Loan crisis of the ‘80s when a number of lenders actually went to jail. An article in the latest issue of Rolling Stones Magazine, based on the Senate’s report argues that the report has laid out the evidence. Now the Justice Department should bring criminal charges against the bankers responsible for what the banks did.
As often pointed out earlier on Icelog, the Icelandic Special Investigative Committee outlined many cases in its report now being investigated in Iceland. The SIC informed the Office of the Special Prosecutor of findings it found to be suspicious. The UK Serious Fraud Office is conducting an investigation into Kaupthing’s operations.
*The hearings can still all be watched on C-Span, ideal to watch while you cook or do other things that leave your mind mostly free. Senator Carl Levin was the absolute star, some memorable moments when he was questioning the squinting Goldman Sachs CEO Lloyd Blankstein.
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